Dollar Bears Take A Breather On Inline Factory Inflation

Though the fundamental fuel from the economic calendar was not yet exhausted, dollar volatility seemed to be. Traders started taking profits for the week after a disarming producer prince index print that fell on target with expectations.

The benchmark EURUSD set the pace with the solidifying 1.3145 resistance level, though a spike below 1.3100 offered a quick buying opportunity. The inverse, USDCHF started to make higher intra-day lows starting from 1.2330, though 1.2385 was all dollar bulls could muster to the top side. Deep liquidity is obviously needed in the battle against the carry as the yen-based major spent most of the past 24 hours between 119.60 - 119.10. Finally, weakness in the British pound once again allowed for a dollar move in the after hours worth 50 points.
With the approach of the extended holiday weekend in the US, institutional traders seemed to take today’s fundamentals with a dismissive eye. Realistically, the markets likely had a point of no return for a final event driven trade for Friday in today’s inflation indicator. However, when the data fell exactly in line with expectations in nearly everyone of its key calculations, technical levels took over to anchor price action into the waning hours. These conditions helped mute the other releases for the week, which hit the wires worse than expected. The University of Michigan’s consumer confidence read was the last piece of data on the roster, though sentiment surrounding the number was of two minds. At first glance, the slip from the two-year high 96.9 in January to 93.3 this month was initially seen as bearish. On the other hand, the overall level is still near highs. Leaving a bigger impression on the dollar’s fundamental balance, today’s housing data erased much of the optimism won through Thursday’s NAHB report and previous sales numbers. January housing starts dropped over 14 percent to an annual 1.408 million pace, the lowest number since August of 1997. Permits, a sign of future construction, had also fallen but not nearly to the same extent. Looking to the regional and category breakdown, it was clear that the cold snap across the country was adding to the burden of excess inventories. Single family units dropped 11.2 percent last month, also the slowest pace of starts since August of 1997, while construction in the west plunged the most since 1979 on a 28.5 percent contraction.
Had the two aforementioned indicators been released earlier in the week, they may have leveraged the dollars steady decent. Instead, the January measurement of the producer price index led many traders to put off new trades until next week’s data cycled in. Key next week could be the consumer price index. After Fed Chairman Ben Bernanke said he saw inflation diminishing at his Congressional testimony earlier this week, the market sharpened its focus. Initially, these comments aligned with the bigger than expected drop in import prices. However, after today’s factory numbers, an immediate jump does not seem so likely. Core inflation in the twelve months through January slowed to a three month low 0.3 percent. On the other hand, when the 4.6 percent drop in energy was excluded, the core number was only slightly off the 13 months high. This places a lot of pressure on energy prices going forward to bring prices back into the actionable realm of Fed policy.
Bulls took some money off the table Friday morning as a disappointing mix of macro data levied the unofficial end of earnings season. By 15:45 GMT, the NASDAQ Composite was 0.38 percent lower at 2,487.67. Not far off pace, the S&P 500 followed with a 0.29 percent dip to 1,452.59 while the Dow eased 0.15 percent to 12,745.30. In the morning hours, a few blue chips were cutting their own path. Software leader Microsoft saw its shares drop 2.4 percent to $28.76 after CEO Steve Ballmer remarked that some analysts forecasts for the new Vista operating system were too high. Joining the recent buy back parade, Honeywell Inc. announced its intentions to buy back $3 billion of its shares in the market, though the modest $0.03 slip to $47.54 reflected traders lack of interest.
Treasuries were leaning higher early in the session, though the anti-climactic inflation gauge encouraged traders to put big moves until next week. The ten-year note was trading only 1/32nd higher at 99-10 by 15:45 GMT, with a yield 1 basis point off at 4.711. Bonds followed with a 4/32nds climb to 99-08 while their yields gave up a basis point to 4.797.